Should Ghana Sign the Ukrainian-like Deal the EU is forcing on Poor African Countries? The Debate is now Open!

Counter Arguments to IMANI’s “Evidence-Based Support for Ghana’s Government to Ratify the EPA”

BackgroundI reacted to a report from IMANI entitled “IMANI’s Evidence-BasedSupport for Ghana’s Government to Ratify the EPA” last Wednesday. My reaction of course drew the displeasure of theIMANI team (mainly Franklin Cudjoe) who charged that my reaction was largely unfair and did not take into consideration the gist of the complete report. In any case I decided to counter their complete report and share it on my wall publicly so that we can all engage in a meaningful and educative socio-economic debate regarding the EPA Agreement.

My Philosophy and Objectives regarding the EPA agreement

My main goal is to counter IMANI’s arguments with what economists refer to as positive economic logic/evidence. In order words,using mainly historical data/knowledge to as the basis for any statements about future economic strategies.

Nothing I say in this rebuttal should ever be considered as a personal attack on the think tank or any member of the team.

I personally do not disagree with the concept of a comprehensive international trade agreement in principle. I just disagree with the form of the contract. And the considerable trade and industrial risks that the EU seems to be attempting to dump on ECOWAS economies.

Just like everybody else, I am still learning a lot about this agreement daily and will continue to share my findings on this platform accordingly.

Overwhelming support from exporters of non-traditional products:

IMANI’sArgument

Initial feedback after signing the IEPAhas been positive from the exporters of non-traditional products. These groups of industries endorse the passage of the ECOWAS EPA, which was to have taken place in March 2014 at a meeting of the ECOWAS Heads of State. It however has been postponed to May 2014 in order to rectify technicalities in the contract.

Counter Argument:

From an economic philosophy standpoint, why on earth will the NTE’s ever support such an agreement? NTE’s export everything from groundnut paste to Banku corn dough mix, handicrafts, fruit juices, etc. The Ghanaian NTE sector is one of the fastest growing sectors and robust sectors of our economy clocking an impressive annual growth rate of** about 16.4%, with the highest rate of about 30.4% occurring in 2007.

Will the proponents of theEPA agreement, please get on the record to inform us as to who these supporters within the Ghana NTE sector are? Because they sure as hell weren’t around when their “other” colleagues, chased out the EU Rep Claude Maerten at the forum the other day.

Negligible Monetary and Fiscal loss to the GoG:

IMANI’s Argument

The purported upfront monetary loss to the government of Ghana, should import tariffs be removed from applicable commodities imported from the EU are reportedly valued at USD 378 million according to the United Nations Economic Commission for Africa Study[2] . [Alesser value of USD 150 million has also been projected by the Ministry ofTrade and Industry].What this also means is that, with a total EU import portfolio for 2012 valued at EURO 3,614million (USD 5,023million[3] ), the slashing of tariffs will result in an average savings of 7.4% for consumers of these commodities. The net savings should also compensate for any increments in taxes on incomes and profits by the government.It is also important to note that, the shift to reliance on domestic taxation is inherently better because it is more predictable, facilitating the attainment of a more resilient economy that stimulates better budget planning and execution practices [4].

Counter Argument

In my opinion the argument above trivializes fiscal policy risk issue here. For a struggling economy such as Ghana’s, a relatively guaranteed source of revenue such as taxes on international trade which constitute roughly 5percent GDP[1] cannot be treated as trivial.They serve a revenue as well as protective function in the economy. And importantly there is no guarantee that by our GoG forgoing their relatively safer revenue position, someway somehow, the EU imports and their Ghanaian retail counterparts are necessarily going to reduce the prices in order for us to realize this magical 7.4% “average savings” that IMANI is projecting/claiming.Businessmen are in business to maximize their profits, and thus even if the cost saving that IMANI is realized, there is absolutely no guarantee that businesses will be in a charitable mood and subsequently pass on the savings to the Ghanaian consumers.What guarantees do we have that, this policy change is rather not going to cause kalabule round 2.0 in Ghana?

Being that even the EU and the GoG admits that we’ve not conducted a comprehensive Policy Impact Analysis regarding the EPA yet, how then, did this this Think Tank manage to arrive at such a conclusion? And most importantly, what happens if after a thorough Socio-Economic Impact Analysis, we find out that the net-monetary/fiscal loss to the state will actually be much more significant than this supposedly paltryUSD 378 million figure, after this EPAhas been signed. Then what do we do?

What about the effect on industrial production in Ghana. Let us take the example of Eastern Europe after they joined the EU which eliminated tariffs to and from the EU. They to a large extent de-industrialized and their trade balances with the EU-15 (Western Europe) became negative. The eastern European countries mostly transitioned from agro-industrial economies to service based economies after joining the EU. The reduction and elimination of tariffs did not make their industries more competitive. So why do we thinkIndustrialization in Ghana will be positively affected by signing the EPA? Do we want to industrialize or be a services based economy?

I will rather recommend that the GoG conducts comprehensive elasticity analysis on Taxes, consumer incomes and subsequent retail prices before making any rash decisions. In order for us to thoroughly understand the internal correlations between these internal economic forces and their inherent risks before making such conjectures.

Petroleum Oils:

IMANI’s Argument

Petroleum oils make up a more than 30%of imports. In Ghana, the primary local competition is the Tema Oil Refinery(TOR). Unfortunately, TOR has been unproductive for a great majority of the past four years due to repeated shutdowns. An agreement with Petro Saudi is in the works to resuscitate the factory[5].

Secondly,TOR has been saddled with indebtedness which has threatened the survival of both the refinery and the Ghana Commercial Bank, its primary creditor. The government intervened, paying a total of GHS 1 billion, covering approximately75% of the entire debt portfolio[6]. Suggesting that the TOR is the‘competition’ that needs to be protected is an overstatement.

Counter Argument

Even the UN Millennium Report GhanaEnergy Report [2] recognizes that TOR is a strategic economic development asset whose current poor economic output is largely due to inefficient government subsidies and debt (bonds) mismanagement. In the words of their report ” Traditionally, government has subsidized the price of petroleum products in Ghana as a result energy pricing policies combined with inefficiencies in the Tema Oil Refinery have resulted in a huge buildup in the debt of the Refinery.In 2001 the government restructured a portion of the debt of TOR by transforming them into government bonds which are currently held by the GhanaCommercial Bank. By December 2002, TOR bonds amounted to ¢2.4 trillion or 17percent of the domestic debt stock.” This tells me that, TOR as an asset is not the problem, but instead, theEconomic Management team in charge of running this asset is to blame. Hence we shouldn’t treat the potential risks that EPA could deliver as trivial.

So in IMANI’s judgment, simply becauseTOR happens to be inefficient or ineffective today, GoG should discard of it. My questions for the Think Tankers will be, please look around the developed world and show me one that doesn’t have a decent Oil Refinery? Is readily available fuel/energy supply not at the center of contemporary economies? And isn’t TOR even more critical to our potential economic development agenda, now that we are drilling Oil in our own backyard?

Is it wrong for us to fix it up and leverage TOR as a value generation asset to our nascent Oil industry? How come the same proponents of the EPA who claim that its main objective is to help us develop our economy in the same vein suggest we throw away and not protect key national economic development assets?

The Think Tankers argument about TOR is deeply flawed. During the 2008 global recession crisis, major US auto manufacturing companies appealed to the US government to save them from bankruptcy. The US government could have made the argument that these industries were uncompetitive with foreign car producers and could have refused to help them. But they did not, they bailed them out since they realized the value of US auto manufacturing to American industrial strength.Another example is AIG which was saved by the US government as being too big to fail. What does that tell us? Governments protect strategic national assets. Why should we not do the same?

Manufacturingand Agricultural Products:

IMANI’s Argument

The sector for manufacturing of machinery and equipment and of transportation equipment is not occupied by any major local entity, thus removing tariffs has a net benefit of lowering costs of these commodities to consumers, and in fact, lowering the cost of production of local industries. The fourth largest import, being foodstuffs and beverages will continue to bear tariffs, as part of the agreement. Agricultural products that are considered sensitive are all in the exclusion list of the MarketAccess Offer (MAO). This is a list of items that are excluded from any tariff liberalization. It includes all agricultural produce and products manufactured in the country. Ghana is under no legal obligation to reduce or remove tariffs from these items at anytime. Foodstuffs and Beverages imported from the EU,representing about 4.7% of total exports falls within the 25% Exclusion list,and thus will incur import duties. This trading/market arena thus remains unchanged.

Counter Argument 4

There are numerous hidden side effects to our nascent agriculture and manufacturing industries in the actual contract. Our main exports to theEuropean Union are raw materials from our NTE (Non Traditional Exports) sector. The European Unions’ major exports to Africa are finished products such as machinery, processed food products, etc. Tariff-free access to their will make our raw materials for their industries cheaper.Tariff-free access to our market will make their finished products cheaper. So what will be the real economic consequence you may ask? We will feed their industries with even cheaper raw materials and they will in turn kill our nascent industries. And even more importantly, this cost savings from cheaper raw materials imports will subsequently make EU more productive and cost effective in the global trading arena. It will also make EU products in the global markets more price competitive against their major competitors likeChina, et al. Simple.

We will also lose the revenue we would have gained from taxing their exports to us. So did we come or did we go (as Ghanaians will say)?

Also in addition to the highly volatile foreign currency market and perpetual energy challenges, our local manufacturing and agriculture industries will be faced with increased competition from EU competitors if EPA is signed regardless of the exclusion list of the Market Access Offer (MAO).

Textile Industry:

IMANI’s Argument

In the textiles industry, its struggles pre-date the EPA agreements with the EU. The main challenges of the Textile industry today are cheaper products and also fake products from China. In spite of the import tariffs imposed on the imported textiles, the local industry is still on the ropes. This scenario makes it clear that imposition of tariffs is not in itself a solution to the high cost of production in Ghana. Thus, the onus falls on government to assist local industries to improve their competitiveness. This will enhance their productivity and lead to better competitiveness.

Counter Argument

Let’s give IMANI a bit of a historical perspective on this matter, “Nearly two decades after independence, the textile sub-sector was the major key player in Ghana’s industrial sector, contributing signiﬁcantly to employment and growth in the economy. However, the sub-sector which was once the leader in Ghana’s industrial sector has undergone a considerable decline over the years due largely to the liberalization programs which made it almost impossible for Ghana’s textile products to compete with the cheap imports, particularly from Asia.” [3]

So because our nations textile industry is currently struggling to compete with the influx of goods from China, EU, etal, according to our Think Tankers, we should make the situation even worse for them by removing tariffs. Glorious logic!

With this economic historical perspective in mind, I believe that with the proper economic management support and protection from the government, our textile industry will be able to rebound and improve their competitiveness whilst making a meaningful contribution to the GDP of Ghana.

Unproductive Ghanaian industries:

IMANI’s Argument

As demonstrated, the central arguments not to sign the EPA are therefore, arguments to protect unproductive industries that are causing the government billions in bailouts and subsidies. These arguments also make claims to premature collapse of nascent industries whose chances of growth will be thwarted with the ratification of the EPA. It is not financially prudent to collapse the NTE industries that are currently productive, profitable and making growing contributions to GDP, by gambling on industries with questionable future profitability.

Counter Argument

So simply because some of our industries are struggling today, thank tankers are suggesting that we abandon them rather than ramp up systemic prudent economic support for them in order for them to become more effective and productive contributors to our GDP. What an excellent suggestion by IMANI. Clearly the proponents of this arguments never studied in any great depth the economic histories of the developed Western countries including even china.The fact of the matter is that, at one point in time or another, all these industrialized countries had industries with “questionable future profitability”, etc. But prudent long-term economic management strategy, doesn’t support an abandonment philosophy, but instead increased governments support and improved economic management with a medium to long-term strategic performance based perspective.I will therefore conclude that abandoning our “struggling” industries in order to welcome with open arms, their EU counterparts, simply because they are currently more profitable is less than a sound economic argument. Not even western economic history is on the side of the industrial abandonment argument being advanced by IMANI.

The argument being made by the pro-EPA think tankers in the case of manufacturing is patently pathetic. We will give an example of South Korea. South Korea wanted to establish a steel industry in the 1960s as a basis for building a manufacturing and industrial base. Their attempts to access foreign capital from the International Bank for Reconstruction and Development was denied, they were told that a poor country like South Korea did not need such a high tech industry.In fact, The sector for manufacturing of machinery and equipment and of transportation equipment was not occupied by any major local entity , hence they could have decided to import items in these sectors. But no, they did not. They went ahead and established a nascent steel industry which became the basis for their automobile and ship building industry. If they had signed a free trade agreement back then at the very beginning, would South Korean industry and manufacturing have survived? I highly doubt that. Let us again remember …

That the US saved so called inefficient auto companies in the 2008 crisis. They could have allowed them to fail. Do we have a our own list of strategic Too big to Fail industries that we are willing to support? Or do we want to remain service sector appendages toWestern economies instead of supporting local industries to reduce our trade imbalances?

Non-TraditionalExports are doing well, will do better with EPA’s

IMANI’s Argument

In the NTE sector, total value of exports has quadrupled from approximately $500m to over $2billion between 2001and 2012. In 2012, the sector contributed over $2bn to the country’s GDP,bringing in hard currencies as well as enhancing the country’s balance of trade. The negative growth rate in 2012 was due to drop in prices of key products such as cashew nuts, cocoa paste and canned tuna.Furthermore, a lifted ban on cocoa exports and derivatives from Côte d’Ivoire, limited the market opportunities for local cocoa companies in Ghana. Lastly, unfavorable cross-border trade in cashew nuts with Burkina Faso and Cote d’Ivoire compounded these challenges in 2012.However, the projections for 2013 are bright at 3.3billion USD. Against the background of declining prices for cocoa and gold, NTEs can also serve as a solid diversification platform to minimize the shocks from the country’s major export commodities.

The economic importance of these companies, if the EPA is not signed, are the loss in corporate tax contributions, employee tax contributions, annual payroll and job creation, social security contributions, direct purchases, contribution toGDP, and various other social responsibilities within the Ghanaian economy. TheNTE industry provides thousands of direct and indirect jobs to Ghanaian’s, and the numbers will increase if the sector is provided with the needed support and incentives to thrive.These companies will not survive if the EPA is not signed. One of the big exporters of tuna, which makes up 7% of the total value of non-traditional exports, will be crippled by a 20.50% tariff, when at 0% tariff,it has a mere 5-6% advantage over the same commodity imported to the EU from other countries.

Counter Argument

Economic Armageddon argument not true,there might be some temporary revenue loss through decreased corporate tax contributions, employee tax contributions, annual payroll and job creation,social security contributions, etc. GoG can make up for the temporary fiscal losses by adopting mid to long term alternative trading partners development strategies with China and otherBRIC counterparts, etc.

And besides even if we lost the revenue temporarily in the form of diminished EU tax receipts, the future of the economic sovereignty of the nation, and our ability to freely formulate alternative international trade agreements with competing economic blocs such as ASEAN remains intact. Why tie ourselves to a shotgun marriage that we don’t really need?

Potential Significant Loss of FDI

IMANI’s Argument

Loss of FDI: If Ghana fails to ratify the EPA, the country will find it extremely difficult to attract Foreign Direct Investments (FDI) into the NTE sector and it will also need to find favorable export markets and import partners. Currently, companies operating within the NTE sector have indicated that they will be forced to set up shop in other African countries if Ghana decides not to ratify the IEPA. This could be disastrous for Ghana, given Cote d’Ivoire, for example has indicated it will ratify its IEPA.

Counter Argument:

To me this statement is nothing short of an exaggerated economic risk. The business opportunities in Ghana are enormous and as long as the government is able to employ and execute sound economic management policies, I don’t see how by us refusing a bad deal, all of a sudden, we become an overnight unattractive investment destination. The key factor for any investor in Ghana is the ability to generate a positive return on his investment (ROI). So as long as we manage our economy efficiently and effectively, EPA or no EPA, we shouldn’t be scared.

And what is this laughable notion of “it will also need to find favorable export markets and import partners”. Industrial countries simply need our raw materials. Period. The more trading partners they have, who are offering them the same raw a materials, the better and not the opposite. Because then the increased supply places downward price pressures on the commodities exporters (in this case ghana and ECOWAS) and vice versa.So if the EU decides to take us out of the raw materiel supply market, then, that will simply mean, less raw material supply for their industries and that means they will need to, all things being equal, start paying more for the same commodities which will rather hurt their economies. So in conclusion, sound economic philosophy doesn’t support this stated position by IMANI. Sounds more like shameless fear mongering to me (but then again i might be wrong:)).

We have FDI flows into Ghana. What have been the results so far? The results have being mixed at best. We have firms repatriating 100 percent of their profits out of Ghana. What is the guarantee that the EPA will change the dynamics of profit repatriation to the detriment of foreign currency reserves in the country and the availability of recycled in country capital to finance capital projects?Let us also remember Greece which is part of the EU and hence the free trade zone. High FDI inflows contributed to an expansion in consumption demand. Now what is happening to Greece, it is mired in debt with a dramatic contraction in GDP. Note that the Greek economy is also largely un-industrial like that of many west African countries. FDI did not change that. So why should FDI change the structure or positively influence the economic parameters in Ghana. At worst we will have 15 Greece like failed economies in ECOWAS.

IMANI’s reports conclusion

IMANI’s Argument

Conclusion and Warning: The evidence mounted for ratifying the EPA is concrete versus the intangible and conditional explanations rendered for why we should not sign. Ghana must sign the EPA agreement. It is a sure way of diversifying our exports. Within creasing calls from local and international agencies for Ghana to diversify its exports, coupled with an economic growth strategy based on the expansion of exports, NTEs have a critical role to play if these objectives are to be achieved.The NTE sector possesses great potential for growth and expansion. If Ghana progresses with the EPA, it must spend the EU support funds judiciously to build up local industry capacity during the five – year window. It should also increase funding to key export trade agencies (GEPA) to ably assist the private sector to drive the anticipated increases in NTE revenue in subsequent years.Though the country has demonstrated a competitive advantage in tropical agricultural products, it is imperative to expand the production base of these products as well as seek avenues of promoting value addition through processing.Full ratifications of the agreement, if signed, will take several years to take effect. Additionally, full ratifications by ECOWAS members are not a guarantee that the EU will not have separate trade agreements with each ECOWAS member. It certainly wouldn’t mean ECOWAS members will respect their own protocols given Nigeria’s non-compliance with current ECOWAS Trade Liberalization Schemes (ETLS). To fill the gap between ratification of the EPA and expiration of the IEPA, the IEPA must be extended with full affirmation from the government to ratify the EPA come May 2014.

Counter Argument

Ghana must not sign the EPA agreement in its current form. Lets work with our ECOWAS partners the same way the CARICOM forum came together to fight for more favorable CARICOM EPA terms rather than fall for this fallacious notion that, if we refuse to sign the EPA our economic lives will somehow end suddenly.

Export diversification is very important for a economic development and future prosperity. But exports from our NTE sector can be very valuable to numerous Asian and North American economies and thus, why we should feel pressured to somehow “save” this industry by endangering our whole nations future through reckless EU EPA agreements. Lets first conduct a through impact analysis of this deal (something which our own ministers of government have agreed we haven’t performed yet).

The EU has offered 6.5 billion Euros in funds to the ECOWAS countries for 2015-2020 as support funds to help the transition. There are 15 ECOWAS countries. That amounts to about 430 millionEuros for 5 years for each country. That further amounts to about 85 millionEuros per year per country. Are we serious in thinking that this paltry sum will be enough to support and build up local industry capacity???The EU spent hundreds of billions of Euros in helping Eastern European countries transition to the EU which basically meant they were joining a free trade zone. Even with that amount of support, Eastern Europe de-industrialized for the most part and became service based economies. Their GDP per capita is still for the most part far lower than the original EU countries of West Europe. Even the added extra benefit of free movement of people after their accession to the EU free trade zone has not brought convergence in GDP to western European levels.In fact many East Europeans to cope with unemployment at home move to western European countries to work. They can do that since they have free movement of people within the EU. Will unemployed west Africans be given that opportunity to move freely to richer EU countries to work? I highly doubt it. Let us now take a look at Geopolitics for a moment. The ill fated EU association agreement with the Ukraine promised this: Europe promised that signing the association agreement would save Ukrainian exporters nearly $490 million over 10 years, as 95 percent of goods would have zero customs duties.The previous Ukrainian government did an impact assessment and realized that it would kill industry in the Eastern Ukraine. They demanded billions of Euros from the EU to help transition. The EU refused then leading to the events we have now. Now the EU to help the new interim government in Kiev is offering 15 billion Euros to help the Ukraine implement the free trade association agreement.

One country the Ukraine of 45 million people is getting 15 billion Euros now with a further promise of more billions of Euros to come and the whole ECOWAS with more than 400 million people is being offered a paltry 6.5 billion Euros for five years to help with the transition?

I will submit that if fear mongering can described as “evidence” or concrete, then IMANI has a very strong case. But nonetheless it wouldn’t make it a sound economics based case but rather a mostly psychological or politically inclined argument.

And if our own government officials are publicly admitting that they haven’t performed the necessary due diligence yet, then how on earth can IMANI, reach such a strong “Evidence Based” conclusion without even knowing a third of the facts as in the actual letter of the contract?

3 Responses to “Should Ghana Sign the Ukrainian-like Deal the EU is forcing on Poor African Countries? The Debate is now Open!”

You raise some great points. I'll however take a different tack. I think culture and history have to be considered as well. Europe didn't do much to improve African countries when they were part of their so called crowns or empires so there is certainly less incentive to work towards your benefit now. If you proceed with any other mindset you are in trouble.

These kind of frameworks benefit those with money to start with because money is mobility, its branding and market awareness. Take countries joining the EU after its initial inception. Industry from the entrenched (already part of the vested entity) fair better significantly than those joining. Can we then say that maybe the EU was simply looking for more customers for its core clients? As you pointed out, the numbers do not lie. The Ukraine and other former block countries have a lot of exceptional engineering talent. Do they end up competing with Airbus or merely become contractors? Thus how do Chinese car makers and aerospace compete globally?

China much more than India exercises protectionist measures which historically the West has always employed when they can't afford anything else; making certain that Chinese companies will have first mover advantage in Chinese markets. Eventually they have the power and the wealth to compete globally. Compete however is a term that implies equality. The analysis of African businesses and farmers who don't have correlations in the EU is much less important than those that do, because that's where there is actual competition and the EU correlation is likely to be the winner of that bout. When your economy is still a fledgling economy any analysis of a fledgling economy that tries to determine what markets are unworkable after only a decade or two is foolishness. African countries are some of the youngest in the world but unlike most, experienced out and out attempts to dehumanize and destroy their populations for hundreds of years. It takes time to get from under that.

Here in the US they recently reported how Africans have higher education attainment than Asians here in the US. That's important because if by 2050 Africa will really have more people than China, do you really want to leverage your country's ability to create? Keeping out all foreign competitors until your people start innovation, is why China didn't care about Intellectual Property rights for so long. Bear in mind that the US and Russia copied everything they could off Germany after World War II even taking their scientist and forgiving their transgressions a la von Braun the father of the infamous V2 rocket which rained down on London during the war, who later became the father of NASA. Letting in foreign companies kills innovation by a country's own, by removing the need to find a solution, because its being solved by a foreign company and/or the foreign company has many more resources, especially in the form of their parent government creating paths for them. Why would African governments cede the paths of innovation for their own people by making them thoroughfares for foreign farms and businesses.

What African countries should be doing is creating mechanisms for Diasporas like myself to return and contribute with business and experience in shared partnerships with our Brothers and Sisters on the Continent. China and India both did this and it helped significantly. If you must have a company started on foreign soil, why not a Diaspora formed company. I'd think that preferable than one from the EU.